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Friday, July 28, 2006

The Outlook For Commodity Prices

By Yaser Anwar, CSC of Equity Investment Ideas

The current volatility in commodity prices begs the question of whether this is the start of a bear market or just a correction in a very long-term bullish trend. Historically commodity bull markets last upto 10-15 years.

The odds are good that the bull market that began in 01 has not yet run its full course.

The important thing to remember is that no great bull market has been immune to such corrections. Even the Nasdaq in the 1990s and gold in the 1970s saw corrections of as much as 30 percent in the context of a longer-term trend higher.

Gulf of Mexico oil and gas production still hasn't fully recovered from hurricanes Katrina and Rita. And supplies were severely interrupted for months after the storms last year. If another major storm were to affect drilling operations in the region, supplies of oil and gas could be cut off once again, causing another shortage and spike in energy commodity pricing.

Furthermore, real commodity prices are still low relative to their long-term trend, despite rapid increases in recent years. One example would be Natural Gas, which is selling roughly around 59% of their Crude equivalent value.